Deck 6: Costs

Question 1

Sarah earns $40,000 per year working for a large corporation. She is thinking of quitting this job to work full time in her own business. She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business. Her annual opportunity cost of this new business is

A)$0.
B)$40,000.
C)$45,000.
D)$90,000.

Answer 1

$45,000.

Question 2

The Nifty Gum Co. has purchased a large parcel of land for $1 million. The company recently discovered that the land is contaminated and is worthless to all possible buyers. The opportunity cost of the land is

A)$0.
B)$1 million.
C)some amount greater than $0 but less than $1 million.
D)equal to the cost of the factory that was planned to be built there.

Answer 2

$0.

Question 3

One problem with measuring a durable good's cost is

A)how to account for depreciation of the good.
B)how to handle the cost if the value changes over time.
C)that the good may break before the end of its estimated useful life.
D)when to decide to throw it away for a newer model even if the cost has not been accounted for.

Answer 3

how to handle the cost if the value changes over time.

Question 4

Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month and brought in revenues of $14,500. What are Manisha's economic profits?

A)$3,000
B)$4,000
C)-$5,000
D)-$6,000

Question 5

A sunk cost is

A)the cost for drilling certain types of wells, such as a well for water.
B)a past cost that cannot be recovered.
C)a cost that is highly relevant for decision-making.
D)an opportunity cost.

Question 6

Manisha could work for another firm making $10,000 per month, but she decides to open her own gourmet cheese store and pay herself $2,000 per month. In her first month of operations, she spends $6,000 on cheese, $1,000 on other items, and $2,500 on rent. She had a great opening month and brought in revenues of $14,500. According to her accountant, what are Manisha's profits?

A)$3,000
B)$4,000
C)-$5,000
D)-$6,000

Question 7

Sue is taking an accounting job she was offered that pays $67,000 per year. She also had two other offers, a sales job paying $71,000 per year and a marketing job paying $65,000 per year. What is Sue's opportunity cost of taking the accounting job?

A)$65,000
B)$67,000
C)$71,000
D)$136,000

Question 8

One problem with measuring a durable good's cost is

A)how to allocate the initial purchase cost.
B)how to account for depreciation of the good.
C)that the good may break before the end of its estimated useful life.
D)when to decide to throw it away for a newer model even if the cost has not been accounted for.

Question 9

An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

A)The amount of money you would have spent to pay for the dinner yourself.
B)The money your friend could have made buying a winning lottery ticket.
C)The money you could have made working overtime at your job.
D)Both A and C

Question 10

A durable good is product that

A)holds up well under abuse.
B)has had the same design over a long period of time.
C)is purchased only once.
D)is usable over a long period of time.

Question 11

You purchase a pizza oven that is expected to last 10 years for $15,000. How do you account for the economic cost of the oven?

A)Expense the oven, taking a write-off for the entire price in the first year.
B)Amortize the cost over the 10-year life of the oven, resulting in a cost of $1,500 per year.
C)Calculate the value of renting the oven to someone else and use that as your cost.
D)The cost is the price of the oven minus any revenue made selling pizzas made in the oven.

Question 12

If a firm buys a building so as to have office space for its workers, the monthly opportunity cost of the building is best measured as

A)the monthly mortgage payment the firm must pay.
B)the price the firm paid divided by twelve.
C)zero.
D)the rent the firm could earn if it rented the building to another firm.

Question 13

If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the opportunity cost of using the van is

A)$10,500.
B)$7,500.
C)$18,000.
D)$3,750.

Question 14

Tom is going to quit his job to pursue his PhD in economics, which will take him 6 years to complete. He currently makes $55,000 per year as a high school teacher. While going to school, he will receive a stipend of $24,000 per year plus $6,000 per year to help cover food and rent. His living expenses are the same regardless of what he does. What is Tom's opportunity cost of pursuing his PhD?

A)$150,000
B)$180,000
C)$186,000
D)$330,000

Question 15

Which of the following is most likely to have increasing opportunity costs?

A)A riding lawnmower.
B)An office building in Tokyo.
C)A large copy machine.
D)A pizza oven.

Question 16

An old friend takes you out to dinner and pays for your meal. Which of the following best represents your opportunity cost?

A)Going to the beach.
B)Attending a concert.
C)Studying for your next microeconomics exam.
D)Unable to determine with the information given.

Question 17

Which of the following is NOT an explicit cost?

A)$200 to hire 2 gardeners for landscaping work
B)$1500 to buy bricks for the driveway of your house
C)$25 for lunch to serve to your workers
D)the $100 in interest you lost by using your CD funds to pay for a new pizza oven

Question 18

Why might a police officer NOT pull over someone speeding two miles over the speed limit?

A)The explicit costs of stopping the driver are too high.
B)The opportunity costs of stopping the driver are too high.
C)The opportunity costs of stopping he driver are too low.
D)The explicit costs of stopping the driver are too low.

Question 19

Which of the following is most likely to have declining opportunity costs?

A)A delivery van.
B)An apartment building in Manhattan.
C)An acre of land in San Francisco.
D)A park in downtown London.

Question 20

Economic costs of an input include

A)only implicit costs.
B)only explicit costs.
C)both implicit and explicit costs.
D)whatever management wishes to report to the shareholders.

Question 21

If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it, the opportunity cost is

A)$0.
B)$31,250.
C)$125,000.
D)$93,750.

Question 22

If a firm buys a delivery van for $18,000 and can resell it in 2 years for $7,500, the sunk cost is

A)$10,500.
B)$7,500.
C)$18,000.
D)$0.

Question 23

Marginal cost is

A)positive or zero.
B)negative or zero.
C)positive or negative but not zero.
D)positive, negative, or zero.

Question 24

An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last. An economist may amortize the expense of a durable and never fully account for the total expense.

Question 25

Variable costs

A)decrease with increasing output.
B)increase with decreasing output.
C)decrease with decreasing output.
D)might increase or decrease with increasing output.

Question 26

You have two career options. You can work for someone else for $50,000 a year, or, you can run your own business, with an annual revenue of $100,000, and explicit costs of $40,000 annually. Explain which career option a profit-maximizer would select and why.

Question 27

When buying a piece of equipment, it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.

Question 28

Variable costs are

A)a production expense that does not vary with output.
B)a production expense that changes with the quantity of output produced.
C)equal to total cost divided by the units of output produced.
D)the amount by which a firm's cost changes if the firm produces one more unit of output.

Question 29

Which of the following statements is NOT true?

A)AC = AFC + AVC
B)C = F + VC
C)AVC = wage/MPL
D)AFC = AC - AVC

Question 30

A firm's marginal cost can always be thought of as the change in total cost if

A)the firm produces one more unit of output.
B)the firm buys one more unit of capital.
C)the firm's average cost increases by $1.
D)the firm moves to the next highest isoquant.

Question 31

If a firm buys a specialized metal stamping machine that will last 4 years for $125,000 and cannot resell it, the sunk cost is

A)$0.
B)$31,250.
C)$125,000.
D)$93,750.

Question 32

Joey's Lawncutting Service rents office space from Joey's dad for $300 per month. Joey's dad is thinking of increasing the rent to $400 per month. As a result Joey's marginal cost of cutting grass will

A)increase by $100 divided by the amount of grass cut.
B)increase by $100.
C)decrease by $100.
D)not change.

Question 33

Fixed costs are

A)a production expense that does not vary with output.
B)a production expense that changes with the quantity of output produced.
C)equal to total cost divided by the units of output produced.
D)the amount by which a firm's cost changes if the firm produces one more unit of output.

Question 34

Average variable cost (AVC)

A)is the variable cost divided by the average sales price of the final good.
B)is the variable cost divided by the quantity of output produced.
C)is equal to average fixed cost (AFC)when no output is produced.
D)is always less than average fixed cost (AFC).

Question 35

Average variable cost (AVC)

A)always increases with increased output.
B)always decreases with increased output.
C)are always flat.
D)may either increase, decrease, or remain flat with increased output.

Question 36

Four years after graduating from college you must decide if you want to go on as an accountant (your college major)or if you want to make a career change and become a singer. The cost of your education will matter for your decision.

Question 37

When a firm produces one unit, the variable cost is $3. When the firm produces two units, the variable cost is $6. What is the marginal cost associated with two units of production?

A)$2
B)$0.5
C)$6
D)$3

Question 38

Average fixed cost (AFC)

A)is the fixed cost divided by the average sales price of the final good.
B)is the fixed cost divided by the quantity of output produced.
C)is $0 when no output is produced.
D)is always less than average variable cost (AVC).

Question 39

Fixed costs

A)are always sunk.
B)are avoidable.
C)are sometimes sunk.
D)sunk in the short run, but not in the long run.

Question 40

Average fixed cost (AFC)

A)rises as output rises.
B)rises as output falls.
C)falls as output falls.
D)is always fixed across all output ranges for the given production function.

Question 41

Assume baseball player salaries are fully determined before the season starts. From the point of view of the baseball team owner, player salaries during the course of the season are then

A)variable costs.
B)marginal costs.
C)fixed costs.
D)average costs.

Question 42

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The marginal cost of the 5th T-shirt is

A)2.
B)10.
C)12.
D)60.

Question 43

In the short run, the point at which diminishing marginal returns to labor begin is the point at which the marginal cost curve

A)peaks.
B)bottoms out.
C)is upward sloping.
D)is downward sloping.

Question 44

If the average cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE?

A)AFC is falling.
B)AVC is rising.
C)MC > AVC.
D)All of the above.

Question 45

Suppose the short-run production function is q = 10 ∗ L. If the wage rate is $10 per unit of labor, then AVC equals

A)q.
B)q/10.
C)10/q.
D)1.

Question 46

When you have diminishing marginal returns to labor,

A)variable costs remain constant as more output is produced.
B)variable costs fall as more output is produced.
C)variable costs rise as more output is produced.
D)fixed costs rise as more output is produced because you have to buy more equipment to compensate.

Question 47

If average cost is decreasing,

A)marginal cost equals average cost.
B)marginal cost exceeds average cost.
C)marginal cost is less than average cost.
D)Not enough information is given.

Question 48

Which of the following will cause the average cost curve of making cigarettes to shift?

A)a $5 million penalty charged to each cigarette maker
B)a $1 per pack tax on cigarettes
C)a $1 an hour wage increase paid to all cigarette production workers
D)All of the above.

Question 49

If the marginal cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE?

A)AFC is rising.
B)AVC is rising.
C)MC > AVC.
D)MPL is falling.

Question 50

Suppose the short-run production function is q = 10 ∗ L. If the wage rate is $10 per unit of labor, then AFC equals

A)0.
B)1.
C)10/q.
D)It cannot be determined from the information provided.

Question 51

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. Which of the following statements is TRUE at all levels of production?

A)MC = AVC
B)MC = AC
C)MC > AFC
D)All of the above.

Question 52

Suppose a firm can only vary the quantity of labor hired in the short run. An increase in the cost of capital will

A)increase the firm's marginal cost.
B)decrease the firm's marginal cost.
C)have no effect on the firm's marginal cost.
D)More information is needed to answer the question.

Question 53

Suppose the short-run production function is q = 10 ∗ L. If the wage rate is $10 per unit of labor, then MC equals

A)q.
B)q/10.
C)10/q.
D)1.

Question 54

Which of the following will cause the marginal cost curve of making cigarettes to shift?

A)a $5 million penalty charged to each cigarette maker
B)a $1 per pack tax on cigarettes
C)a $1 million advertising campaign by the American Cancer Society
D)All of the above.

Question 55

Suppose the total cost of producing T-shirts can be represented as TC = 50 + 2q. The average cost of the 5th T-shirt is

A)2.
B)12.
C)52.
D)60.

Question 56

If average cost is positive,

A)marginal cost equals average cost.
B)marginal cost exceeds average cost.
C)marginal cost is less average cost.
D)Not enough information is given.

Question 57

Suppose the short-run production function is q = L^0.5. If the marginal cost of producing the tenth unit is $5, what is the wage per unit of labor?

A)$1
B)$0.5
C)$0.25
D)It cannot be determined without more information.

Question 58

If a particular production process is subject to diminishing marginal returns to labor at every level of output, then at every level of output

A)AC is upward sloping.
B)MC exceeds AVC.
C)AFC is constant.
D)None of the above.

Question 59

A firm's cost curve is determined by

A)congressional laws.
B)whether the firm hires engineers or not.
C)natural laws.
D)the firm's production function.

Question 60

If the average cost of producing a good is increasing as a firm produces more of the good, then which of the following must be TRUE?

A)AFC is falling.
B)AVC is rising.
C)MC > AVC.
D)All of the above.

Question 61

A pizza parlor's rent is

A)sunk in the long run.
B)fixed in the long run.
C)avoidable in the short run.
D)variable in the short run.

Question 62

If the isoquants are straight lines or L-shaped, then a cost-minimizing firm will

A)not be able to minimize costs.
B)find the lowest isocost line touching the relevant isoquant.
C)find the highest isocost line touching the relevant isoquant.
D)choose not to produce any output.

Question 63

Isocost lines

A)represent the combinations of inputs that have the same marginal cost.
B)represent the combinations of inputs that have the same total cost.
C)are the inverse of the isoquant lines.
D)represent supply and demand for inputs at a given cost.

Question 64

A specific tax of $1 per unit of output will affect a firm's

A)average total cost, average variable cost, average fixed cost, and marginal cost.
B)average total cost, average variable cost, and average fixed cost.
C)average total cost, average variable cost, and marginal cost.
D)marginal cost only.

Question 65

Assume Congress decides that oil companies are making too much profit and decides to increase the tax on oil companies for each gallon of gasoline produced. This would

A)guarantee a decrease in profits.
B)guarantee an increase in profits.
C)guarantee an increase in tax revenues.
D)None of the above.

Question 66

The marginal cost curve intersects the average fixed cost curve at its minimum.

Question 67

When the isocost line is tangent to the isoquant, then

A)MRTS = -w/r.
B)the firm is producing that level of output at minimum cost.
C)the last dollar spent on capital yields as much extra output as the last dollar spent on labor.
D)All of the above.

Question 68

Isocost lines

A)are dependent upon the technical efficiency of the production function.
B)are dependent upon the quantity of goods a firm wants to produce.
C)are dependent upon the costs of a firm's inputs.
D)are the same as budget lines.

Question 69

The slope of the isocost line tells the firm how much

A)capital must be reduced to keep total cost constant when hiring one more unit of labor.
B)capital must be increased to keep total cost constant when hiring one more unit of labor.
C)more expensive a unit of capital costs relative to a unit of labor.
D)the isocost curve will shift outward if the firm wishes to produce more.

Question 70

In the long run, fixed costs are

A)sunk.
B)avoidable.
C)larger than in the short run.
D)not included in production decisions.

Question 71

The Cobb-Douglas production function for a beer manufacturer is q=1.52L^0.6K^0.4. Assume that the firm's capital is fixed at 250 units, the rental rate of capital is $5 per unit, and the wage rate is $10 per hour. The amount of labor needed to produce q units of output is

A)0.0124q.
B)13.832q⁰.6.
C)0.0124q¹.67.
D)13.832q¹.67.

Question 72

A consumer purchases a book by driving across town to a bookstore, standing in line for five minutes to pay the cashier, and then pays $5. The same book is purchased by another consumer who spends 2 minutes placing the order over the Internet for $10. The book necessarily cost the first consumer less.

Question 73

Isoquant lines represent ________, whereas isocost lines represent ________.

A)technical efficiency; economic efficiency
B)economic efficiency; technical efficiency
C)economic efficiency; marginal costs
D)input trade-offs; economic trade-offs

Question 74

The slope of the isoquant tells the firm how much

A)output increases when labor increases by one unit.
B)output increases when capital and labor are doubled.
C)capital must decrease to keep output constant when labor increases by one unit.
D)a unit of capital costs relative to the cost of labor.

Question 75

When the isocost line is tangent to the isoquant, then

A)MPL = MPK.
B)the firm is producing that level of output at minimum cost.
C)the firm has achieved the right economies of scale.
D)All of the above.

Question 76

The Cobb-Douglas production function for a beer manufacturer is q=1.52L^0.6K^0.4. If we assume that the firm's capital is fixed at 250 units and the rental rate of capital is $5 per unit, then average fixed cost is

A)$1250.
B)$1250/q.
C)1.52L^0.6(250)^0.4.
D)Unable to determine with information given.

Question 77

If an isocost line crosses the isoquant twice, a cost minimizing firm will

A)use a different isocost line to select the bundle of inputs.
B)use the input bundle associated with the intersection on the higher point of the isoquant.
C)use the input bundle associated with the intersection on the lower point of the isoquant.
D)Both B and C.

Question 78

Which of the following will cause the average fixed cost curve of making cigarettes to shift?

A)a $5 million penalty charged to each cigarette maker
B)a $1 per pack tax on cigarettes
C)a $3 per hour wage increase
D)an increase in the demand for cigarettes

Question 79

Which of the following is NOT true?

A)Rental costs for a building are sunk in the short run and fixed in the long run.
B)Rental costs for a building are avoidable in the long run.
C)Variable costs, such as ingredients for a pizza, are avoidable in the long run and the short run.
D)Rental costs for a building are fixed in the short run and sunk in the long run.

Question 80

Assume Congress decides that oil companies are making too much profit and decides to tax oil companies for each gallon of gasoline produced. This would

A)shift the marginal cost curve up.
B)shift the marginal cost curve down.
C)shift the average fixed cost curve up.
D)shift the average fixed cost curve down.